Principales Questions: 1. Whether the purpose tests of paragraph 55(2.1)(b) are met when a dividend is paid to purify a corporation for capital gain exemption purpose.
2. Each Class AA and Class X share of the capital stock of a corporation entitles the owner of the particular share of one of this class to participate each year in the annual profits of the corporation in proportion of the number of shares of the Class AA and Class X shares issued at the end of the year. A dividend is paid on the Class X shares equal to the amount of the profit to which it is entitled. No dividend is paid on the Class AA shares. The dividend paid on the Class X shares decreases the value of the Class X share but do not decrease the value of the Class AA shares. How would the safe income be allocated between the two classes of shares?
3. If, in a year, the increase in the value of Class AA shares is higher than the increase in the value of Class X shares because of an unrealised increase of the value of one of the assets, how would the safe income be allocated between the two classes of shares?
4. Whether it is possible to isolate the safe income in one class of shares considering all the assumptions in the example.
Position Adoptée: 1. No position taken.
2. We would apply the position issued in 1981 (part of the "Robertson Rules") stating the income will be attributable to a particular class of shares in the same ratio in which each class would be entitled if all earnings of the corporation, but not share capital, were to be distributed. Furthermore, the safe income is allocated to each class with respect to the holding period of the shares by the shareholder. In the particular situation, the dividend paid with respect to Class X shares would not reduce the safe income on hand in respect of the Class AA shares considering that the value of the Class AA shares is not reduced by such dividend.
3. In the particular situation, same position as the position taken in question 2.
4. In the particular situation, no.
Raisons: 1. The CRA would review all the pertinent facts with respect to a particular situation. The purpose of purification would be one relevant factor.
2. In the particular situation, the previous position taken in 1981 would satisfy the test that the safe income contributes to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received.
3. In the particular situation, as the increase in the value of the assets of the corporation is unrealized and do not form part of the safe income, the safe income would not contribute in that year in that part of the hypothetical capital gain of the Class AA shares.
4. In the particular situation, we should take the same position as mentioned with respect to question 2.
